This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Ben Lavine, chief investment officer of 3D Asset Management based in East Hartford, Connecticut.
“Happiness is having a scratch for every itch.”
—Ogden Nash, American Poet (1902-1971)
With U.S. implied volatility (VIX) reaching a new low, much has been published over the increased popularity to “short” volatility. We commented on this back in June, when the ProShares Short VIX Short-Term Futures ETF (SVXY) had just risen over 70% for the year.
As of the time of this writing, SVXY has now returned just over 100%, making this the home-run trade so far in 2017. Pretty soon, taxi drivers and hairdressers will be bragging about their “short vol” investment strategies.
Whether the extremely low-volatility environment represents a rational reflection of the current macro and investment landscape remains to be seen, as a number of potential head winds are forming on the horizon, such as the regulatory crackdown on excess financial leverage in China and uncertainty over fiscal initiatives here in the U.S.
Yet given the extreme sentiment that “low vol is here to stay,” one cannot help but observe that the market is serving up a big matzah ball to skeptics and naysayers, daring them to take a swing by going long volatility.
However, given the steepness of the VIX term structure (Figure 1), those swinging at the matzah ball need to connect on the first swing, as the radioactive decay from the roll-down cost quickly eats into returns.
Figure 1. Steepness Of Term Structure Means Long-Vol Timing Must Be Spot On (Data as of 7/25/2017)
For a larger view, please click on the image above.